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Under the indirect method, a decrease in accounts receivable during the year is treated how?
AReported as an investing inflow
BDeducted from net income
CAdded to net income
DRecorded as a financing outflow
Answer & Solution
Correct answer: C. Added to net income
1. Rule: decreases in current assets are added to net income.
2. A fall in receivables means more cash was collected than the sales figure implies.
3. Therefore the decrease is added.
4. The common trap is to subtract it; subtraction applies only to increases in current assets.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §7.2.3 "Add/Deduct rules for working capital", p.272_
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